Gone with the Cycle: The Asymmetric Impact of Business Cycle on Growth (with E. Caggiano)
Journal of Economic Asymmetries, Forthcoming
Abstract: This paper investigates the asymmetric effects of business cycle volatility on economic growth in a panel of 99 countries over 1951–2019. Within a β-convergence framework, we decompose cyclical dynamics into three components: position relative to trend, amplitude of deviations, and phase. Three key findings emerge. First, we find robust evidence of β-convergence, which is stronger in per-capita terms than in aggregate output, showing that demographic dynamics partly mask the pace of productivity-driven catch-up. Second, large deviations from trend carry a significant growth penalty, pointing to stable slope asymmetry across specifications. Third, phase effects are not statistically significant, indicating that expansions and recessions do not produce structural jumps in average growth. A Gaussian-mixture clustering of volatility regimes further reveals that pooled regressions are dominated by low-volatility observations, while in high-volatility environments convergence is sharper and volatility costs are more severe. Overall, the evidence supports models in which volatility magnifies effective risk and depresses investment, and highlights the need for stabilization strategies that are both counter-cyclical and volatility-sensitive.
Firm heterogeneity, financial frictions and ambiguity (with L. Carbonari)
Journal of Economic Dynamics and Control, 2023
Abstract: This paper studies the effects of ambiguity (Knightian uncertainty) on business cycles and inequality in an economy with heterogeneous agents. Ambiguity-averse entrepreneurs operate in a model with financial frictions and a market-wide source of ambiguous information. Entrepreneurs employ a worst-case criterion to formulate expectations about the total factor productivity and are heterogeneous in terms of assets and productivity. Comparing our economy with one that has the same fundamentals but lacks uncertainty, we observe that ambiguity: (i) raises the productivity threshold to access the market, (ii) does not alter the relative consumption gap between active and inactive entrepreneurs, and (iii) widens the consumption gap between entrepreneurs and workers. We also find that, in the long-run, an economy featuring ambiguity accumulates more assets and produces more. This is the consequence of entrepreneurs’ hedging strategy and the wage suppression caused by ambiguity.
Abstract: This paper explores forward-looking ambiguity (Knightian uncertainty) in a model with homogeneous workers and credit-constrained heterogeneous entrepreneurs. Agents are ambiguity-averse, using worst-case criteria to form expectations about future productivity. We compare our economy with one that lacks uncertainty and find that ambiguity: (i) lowers the productivity threshold for market entry, (ii) reduces the equilibrium interest rate, and (iii) shifts expenditures between workers and entrepreneurs. These results stem from persistent expectation-realization mismatches. While ambiguity does not affect stability, it alters the convergence rate to the steady state and helps explain key macroeconomic comovements.
On the output effect of fiscal announcements: a causal analysis (with L. Carbonari, A. Farcomeni and G. Trovato)
Abstract: Using data from 16 OECD countries over the period 1981-2011, this paper studies how different policy announcements affect economic growth in situations of fiscal consolidation. We focus on government announcements regarding reductions in expenditure and increases in taxation. We use a mediation analysis to uncover the direct and indirect effects elicited by such announcements. We find that during debt consolidation periods, announcements related to consolidation plans have no direct impact on GDP growth. However, spending cuts announcements have substantial negative indirect effects, resulting in overall negative total effects, while tax increases have negligible indirect and overall impacts. Our findings propose a new interpretation of the results of Alesina et al. (2015): in terms of announcements, once accounting for indirect effects, spending cuts are more harmful to growth than tax hikes.
Bank-Fintech Acquisitions: Evidence on Lending, Deposit Growth, and Risk-Taking M&As (with Salvatore Perdichizzi, B. Pisicoli and G. Vocalelli)
Abstract: We study the effects of fintech acquisitions by traditional banks, a strategic response to rising digital competition in financial services. Using a panel of 69 banks in advanced economies that acquired at least one fintech firm between 2013 and 2021, we examine how these transactions affect deposits growth, credit supply, asset allocation, and risk of the acquiring bank compared to non-acquiring ones. Following the acquisition, banks experience a significant increase in deposits and a moderate expansion in lending. However, a large share of the incremental funding is allocated to securities and other interest-earning assets rather than loans. We also find that loan quality deteriorates post-acquisition: non-performing loans rise disproportionately relative to total lending, and bank-level default risk increases. These effects appear driven by the integration of fintech lending practices—specifically, looser credit standards and weaker monitoring. Our findings highlight both the benefits and unintended consequences of fintech integration. They suggest that while acquisitions may enhance digital capabilities and market reach, they can also amplify risk exposures, with implications for bank supervision and financial stability .
Ambiguous Labor Share: Implications on Stability and the Business Cycle (with S. Biadetti and L. Carbonari)
Abstract: This paper investigates how forward-looking ambiguity (Knightian uncertainty) affects labor share distribution in a macro-development model with entrepreneurs, heterogeneous in productivity and wealth, and homogeneous saving workers. Ambiguity-averse agents make decisions based on worst-case labor share forecasts. Workers’ expectations dominate, leading to a hedging distribution. Ambiguity impacts stability and introduces cyclical fluctuations in labor supply, wages, and production, intensifying short-term economic cycles. Capital over-accumulation occurs as workers save more under uncertainty. Persistent ambiguity leads to capital misallocation, reducing production quality and slowing growth, particularly in developing economies.
Abstract: This paper examines how an economy characterized by heterogeneous entrepreneurs, borrowing constraints, and myopic agents responds over time to a transitory shock that ultimately affects aggregate Total Factor Productivity (TFP). We consider two types of shocks: one to the parameter measuring inequality and another to the parameter reflecting credit market conditions. In both cases, assuming a moderate inequality shock, along the transition path — and in contrast to the perfect-foresight benchmark — myopia: (i) significantly amplifies consumption volatility among workers, and (ii) dampens aggregate output fluctuations. Moreover, we show that under myopic expectations, sufficiently large temporary inequality shocks can induce dynamic instability in the economy.
Abstract: This paper distinguishes between TFP shocks, which affect only Total Factor Productivity, and broad productivity shocks, which jointly impact both TFP and capital share. Starting from a positive correlation between capital share and aggregate TFP, we analyze the effects of these shocks within a stylized economy featuring heterogeneous, credit-constrained entrepreneurs and homogeneous workers. The short-run dynamics of these fluctuations are disentangled using impulse-response functions (IRFs). While the share of production accruing to workers temporarily declines, the overall effect on consumption is positive. Finally, the transitional effects of TFP shocks are independent of agent composition, whereas broad productivity shocks are amplified by heterogeneity.
Abstract: This paper investigates the causal relationship between political stability, inequality, and economic growth using a panel of 82 countries from 1991 to 2023. Building on a mediation framework, we explore whether political stability affects growth directly, by improving institutional quality, and indirectly, through its impact on inequality. We employ linear structural equation models alongside a Gaussian Mixture Model to account for latent heterogeneity, identifying three development regimes based on inequality levels. Both pooled and clustered estimates indicate positive effects on growth. However, while the pooled estimates suggest that most of the effect of political stability on growth is direct, the cluster-specific analyses reveal significant asymmetries. In low- and intermediateinequality economies, rising inequality amplifies the growth effects of political stability. In contrast, in high-inequality contexts, inequality suppresses growth and offsets part of the institutional gains. These findings show that the growth effects of political stability depend on how it interacts with inequality, which varies systematically across development contexts. Ignoring such heterogeneity can lead to misleading conclusions about the role of institutions in shaping growth.
Abstract: This paper investigates the relationship between capital share, total factor productivity (TFP), and inequality using global data from 1954 to 2019. Building on a heterogeneous agent model with financial frictions, we combine theoretical insights with empirical analysis to explore transitional dynamics as economies progress from emerging to developed stages. Using a Gaussian Mixture Model identifies three distinct development phases—emerging, developing, and developed economies; based on this insight, we estimate beta regressions for capital share determinants. Our findings reveal that the negative impact of inequality on capital share diminishes as economies develop, while aggregate TFP remains a consistent positive influence. We document an ”anti-catch-up” effect, whereby advanced economies, being wealthier and more productive, increase the share of income allocated to capital.